A Tax on Super Profits or a Super Tax on Profits?

The Rudd government's root and branch review of the tax system has been an anticlimax mired in a bruising debate with the mining industry. The government's own analytical clumsiness has greatly aided its opponents.

Anyone with even the most scanty public policy experience knows that tax reform is a thankless task. There is no tax that people want to pay. Moreover, given the balance of public finances, a reduced tax burden for anyone almost certainly means a heavier burden for someone else. Little wonder that few recommendations in the long-awaited Henry review have been adopted.

Ultimately, the art of tax reform is to antagonize as little as possible those being asked to pay more and to confer what is taken from them on a sufficiently large number of grateful beneficiaries, hopefully located in strategically placed electorates. This is what the government tried to do.

Treasury is RightThe Treasury boffins are right. The existing mining tax regimes discriminate against exploration and large capital intensive projects. The new tax structure applied in a revenue neutral manner could have supported investment and may have been welcomed by the industry's senior executives.

The government was also right that allowing a full rebate on capital investment when it occurred could lead to large and possibly unpredictable swings in government tax revenue.

To manage this possibility, the government decided that the full capital allowance underpinning the targeted theoretical solution should not be immediately available. The government recognized that delaying the capital allowance had a value. It decided to offer compensation equivalent to the Australian government long term bond yield to reflect that a payment should have been made but was being postponed.

So far, so good.

Slogans Have Gone Too FarSome years ago, however, a slick communications guru persuaded governments to embed key messages in otherwise arcane policy material. Few voters were likely to pore over the minutiae of the industrial relations laws, for example, but "work choices" and "fair work Australia", its political response, were legislated slogans created to elicit strong opinions even among people who had never seen the legislation.

Dozens of references to "super profits" in an otherwise technical document were similarly designed to embed a single thought via the media reporting the changes: that only unusually high profits would be subject to the new 40% tax.

Unfortunately, the writers of the documents accompanying the policy statements had either confused themselves or had deliberately set out to mislead. Despite the sloganeering to the contrary, there was no benchmark profit above which the tax would kick in. All mining profits, under the announced proposal, are to be taxed at 40% no matter how tiny.

Since repeated references to only taxing "super profits" were simply untrue, people who understood how the tax would work have felt aggrieved.

Others to Keep Their Super ProfitsWith the government opportunistically targeting a high profile and profitable part of the Australian economy to boost its tax take, the obvious question arose: if the resources industry is going to be subjected to a progressive corporate tax, why not other industries also?

Rudd responded that a super profits tax should not be extended to banks, for example, since they would simply pass on any extra tax to consumers. Presumably, he thinks higher iron ore costs simply disappear without any subsequent effect on the prices of motor cars or kitchen sinks.

Rudd and his ministers have also argued that only mining companies are given access to a national resource which underpins all of their profits. On this point they are mistaken.

Banks, broadcast media companies and telecommunications providers are just some examples of companies deriving their profits from government endowments. Central bank backing through lender of last resort facilities, broadcasting licenses and bandwidth allocations all underpin profitability in the same way as a right to mine.

Macroeconomic Assumptions to be CriticalAt a policy level, the response seems out of sync with what is happening to the global economy. In this, there is nothing new. Despite the pretence of omniscience practised by treasury secretary Henry and central bank governor Stevens through carefully cultivated public personas and skilled background briefings, their policy track records in recent years have been downright poor.

Recall that, on coming to office nearly three years ago, the newly elected government was urged on by the Reserve Bank to declare war on inflation. By 2008, this was proving a largely incorrect prescription with unemployment fears taking over from forecasts of labour shortages and capacity constraints.

During 2008, the government leapt wholeheartedly from its anti inflation campaign onto the stimulus bandwagon. Subsequently, the speed of recovery surprised the policymakers who had clearly committed too much funding. Yet the government did not react quickly to curtail stimulus spending.

Both the government and the Reserve Bank began embracing the commodity super cycle ideas that had been so erroneously propagated prior to 2008. They seemed to suggest that Australia could be an island of prosperity in an otherwise dangerous world.

Within hours of the tax announcement, riots in Europe illustrated how coping with the events of 2008 could take many years. Even China, on whose continuing prosperity the success of the new tax policy is based, showed during the past week that its economic performance was not going to be a one way bet.

In short, the macroeconomic risks to the assumptions underpinning the new tax regime are considerable. At the same time, we are having to put our faith in a group of people who have not been especially adept at picking macroeconomic turning points.

More Opportunities ElsewhereIn responding to its critics, the government has decided to call the industry's bluff that it might invest elsewhere. On this, too, the government might be on shaky ground. New investment friendly mining provinces in Mongolia, central Asia and central and west Africa have been opening up. Countries in southeast Asia have been cultivating the industry. Canada is still in the picture. So is south America.

The Australian industry has more choices and is vastly more experienced in working offshore than the Canberra policymakers might realize. Even today, corporate headquarters in West Perth are a fašade for mines in the Yukon, Brazil, Senegal and other far flung locations that will now become more attractive investment destinations.

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